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Manufacturing Accounts - Principles Of Accounting

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Manufacturing Accounts

The businesses which produce and sell the items prepare the following accounts at the end of its accounting year:a. The Manufacturing account (to calculate the total cost of production) b. The Trading and profit & loss account (to find out the net profit or loss) c. The balance sheet.(to show the financial position of the business) The total cost of production = Prime cost + Factory overhead The Prime cost = Direct material + Direct labour + Direct expenses Direct material cost = Opening stock of raw materials + purchase of raw materials + Carriage inwards – returns outwards – closing stock of raw materials. Factory overhead expenses = All expenses related to the factory (indirect expenses) In a manufacturing concern, usually there are three kinds of stocks: Stock of Raw materials (the materials which are mainly used for production of the item) Stock of Work in progress (the materials on which some work process have been

/ completed)

Stock of Finished goods (The materials on which all the production processes are completed and for sale to the customers)


In the examination questions, the stock figures will be given separately.

The format of a manufacturing account


Manufacturing Accounts - Principles Of Accounting

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/ Format of trading account of a manufacturing concern

The profit & loss account and the balance sheet preparations will be the same as that of a sole trader’s. So the students have to follow the previous method for the preparation of these.

Fixed expenses and Variable expenses Some expenses will remain constant whether the level of activity increases or falls. These expenses are called fixed expenses E.g. rent of building The expenses which change with changes in activity are called variable expenses E.g: cost of materials. Key points:


Manufacturing Accounts - Principles Of Accounting


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Carriage on raw materials means carriage inwards and it is a part of prime cost. Carriage outwards is shown in the profit & loss account as an expense.

Royalties paid is to be treated as direct expense. Depreciation on Plant and Machinery or any other factory asset is to be treated as factory overhead

expense. Stocks of raw materials and work-in-progress are taken in the manufacturing account and stock of

finished goods is taken in the trading account. Stocks at the end of the year (raw materials, work-in-progress and finished goods) are shown in the

balance sheet as current assets. Owner’s raw materials drawings are shown in the manufacturing account while calculating the prime

cost. Finished goods drawings are shown in the trading account while calculating the cost of goods sold. 

The purchase of finished goods is added with cost of production in the trading account. The depreciation of any asset used in the office should be shown as an expense in the

profit & loss account. Cost of ready made items bought for the production of items manufactured should be treated as

direct expense. Unit cost of production = Total cost of production

No of units produced MCQ.Q 1. The purpose of preparing the manufacturing account is to calculate:A. Gross profit B. Manufacturing profit C.Net profit in a manufacturing account?

D. Cost of productionQ 2.

A Factory power

B. Purchase of raw materials

C Carriage inwards on raw materials Q 3.

D. All of these

Prime cost includes

A. Factory direct wages

B. Factory indirect wages

C. Finished goods Q 4.

What does production cost include

D. Work in progress

The costs of a manufacturing firm are as follows: $

Raw materials purchasedDirect


LabourCost of Raw material consumedFactory overheads


/ 7000 2000

What was the prime cost? A. $10000

Q 5.

B. $15000

C. $12000

Prime cost In a Manufacturing account is equal to

A. All factory indirect costs

B. All factory costs

B. Direct factory costs only

D. Direct materials plus direct expenses

Q 6.

Carriage outward in manufacturing concern is included in which heading?

A. Direct expenses

B. Factory overhead expenses

C. Administrative expenses Q 7.

D. Selling and distribution expenses

Which of the following is not included in the Manufacturing account?

A. Foreman’s wages 

D. $17000

B. Depreciation on factory machinery

C. Indirect wages D. Depreciation on office equipmentQ 8. shows the cost incurred for the production of an item.Direct materials Direct wages $ 700 Manufacturing expenses

$ 100

Factory overhead expenses

$ 300

The following table $ 1200

What is the amount of prime cost? A. $ 2300 Q 9.

B. $ 2 000

C. $ 1 700

D. $ 3 000

How is the production cost calculated in a manufacturing account?

A. Prime cost + administrative expenses B. Prime cost + administrative expenses C. Prime cost + Factory overhead expenses D. Raw materials + direct labour. Q 10.

Which on of the following is not factory overhead expense? A. Wages of cleaners

B. Carriage on raw materials

C. Factory lighting

D. Factory power

Q 11.

Which are the stock figures shown in the manufacturing account?

A. Finished goods and raw materials

B. Finished goods only


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Assignment questions Q1) Zena owns a small manufacturing business. The following balances were taken from her books on 30 June 2001: $ Stocks 1 July


Raw materials

23 300

Finished goods

28 500

Stocks 30 June 2001: Raw materials

25 700

Finished goods

21 500

Purchases of raw materials

265 500

Carriage on sales

3 300

Carriage on raw materials

3 100

Selling expenses

3 500

Bad debts


Factory overheads

30 300

Depreciation of factory equipment

14 000

Factory direct expenses

4 000

Factory wages

100 000

Select the appropriate balances and prepare the Manufacturing account for the year Ended 30 June 2001. Show clearly within the account: cost of raw materials consumed, prime cost, cost of production

/ Q2) Justine is a manufacturer of beauty products. The following balances were extracted from her books on 31 December 2001 after the Manufacturing Account had been prepared. $


Stocks Raw Materials (31 December 2001) Work in Progress (31 December 2001) Finished Products (1 January 2001) Cost of products manufactured

3 530 1 450 11 200 103 780

Sales of finished goods

137 560

Carriage on sales

1 230


3 410

Sales staff’s commission Office expenses Bank charges Plant and machinery

8 970 11 860 60 51 410

Provision for depreciation on Plant and Machinery Trade debtors

9 030 13 600

Trade creditors

5 210

Provision for doubtful debts (1 January 2001) Bad debts Cash in hand

310 460 90

Bank overdraft

1 740

Capital Drawings

60 450 3 250 214 300

214 300 The following additional information is available.

1. Stock of finished products at 31 December 2001 was valued at $10 640.

2. During the year, Justine took finished products valued at $600 from the current year’s production for personal use. No entries had been made in the books.


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3. Sales staff’s commission outstanding amounted to $390. 4. The provision for doubtful debts is to be adjusted to 5% of debtors. 5. $50 for bank charges had not been recorded in the books.

(a) Prepare Justine’s Trading and Profit and Loss Accounts for the year ended 31 December 2001. (b) Prepare the Balance Sheet as at 31 December 2001.

Q:3 Allocate the following costs to Manufacturing account and Income statement Eg:Factory rent Production supervisors’ salary



Manufacturing account

Insurance of factory building Depreciation of office photocopier


d) e)

Revenue commission Raw material purchased


f) Advertising Manufacturing Electricity

h) i)

Carriage on Revenue Carriage on raw materials j)

Bad debts

Q:4 Farhad owns a small workshop and he makes iron gates. The following information was taken from the books on 31 December 2009. 1 January 2010

31 December 2010



Inventories – Raw materials



/ Finished goods


Purchases of raw materials



Carriage on Revenue


Carriage on raw materials


Workshop wages


Sales staff wages


Raw materials returned to suppliers


Workshop light and heat


Workshop general expenses


Depreciation of workshop equipment


Revenues from finished goods


REQUIRED: a) Select the appropriate balances and prepare the Manufacturing Account for the year ended 31 December 2010. b)

Prepare the Income statement for the year ended 31 December 2010.

Q:5 The following information for the year ended 31 December 2008 is extracted from the books of Sammad, the owner of a small fruit juice-bottling factory: 1 January 2010


31 December 201


Inventories – Ingredients (Bulk Orange Juice)


1,070 Empty Bottles and Labels Bottled Fruit Juice





Purchases of:


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Ingredients (Bulk Orange Juice)


Bottles and Labels


Revenue of Bottled Fruit Juice


Factory Wages


Supervisor’s Salary


Factory indirect expenses


Depreciation of Plant and Machinery


You are required to prepare 1. The Manufacturing Account showing clearly cost of raw materials consumed, prime cost and cost of production. 2. The income statement for the year ended 31 December 2010

Q:6 The following information for the year ended 30 September 2003 was extracted from the books of Preserves Ltd, manufacturers of jam and fruit juices. 1 October 2002 $

30 September 2003 $

Inventories: – raw materials

6 800

6 400

– jars, lids and labels

10 400

10 000

– finished goods

21 000

21 600

Purchases: – raw materials

70 600

– jars, lids and labels

17 000


365 000

Factory wages

36 800

/ Factory light and power

29 200

Factory machines repairs

11 400

Carriage on raw materials

11 000

Depreciation of plant and machinery

12 600

REQUIRED: (a) Prepare, in good style, the Manufacturing Account for the year ended 30 September 2003. (b) Prepare the Income statement for the year ended 30 September 2003. Incoming search terms:          

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Manufacturing accounts principles of accounting